Tech Pro. 3823 HK, drops another 6.7%, to .28 hkd (that’s 4 cents, US). Here’s why there is room to fall further.
Just 10 days after its stock collapsed, Techpro 3823 hk directors reached for a self-made life preserver. Unfortunately, the life preserver won’t inflate.
Techpro closed down 86% on July 28th following a devastating report by Glaucus Research. The report by the short seller was long on details which showed multiple frauds including massive under-reporting of “earnings”, and intentional misrepresentation of acquisition costs. Glaucus gave the stock a 0 value. Techpro denied the allegations, but the stock continued to drop, falling to .14 hkD on 6/29 but rising back up to .30 by the end of trading 8/5/16. On that day trading was at an inexplicable 1.3 billion shares versus the average 223 million.
In addition to the stock plunge, the report triggered an avalanche of events, including a violation of listing rules when the plunge forced margin sales by the directors during the 30 day pre-earnings release black-out period. This dropped their combined ownership interests by over 50%. Their ownership will drop further if proposed new share issues happen.
Source: HK filings
Given the drop in price, the trigger was understandable. Had they been able to hold their shares, they would have lost a combined $480 million US. The sale was subsequently reviewed by the directors and declared to be okay, given the exceptional circumstances. Rules were meant to be broken.
Source: HK Filings
In addition to the stock sale violation, the circular with the details for the remaining 50% purchase of the property management firm, Shanghai Fuchao Mgt, were delayed. The Glaucus report stated that the original 50% purchase was overstated in Hong Kong filings. From the same SAIC filings, the property management company’s earnings were also over-stated based on local area rents and Fuchao’s position as a sub-leasing agent, not owner. This was critical in terms of assets and income since it was the only business that consistently reported a profit.
More Fun to Come
After the bell on Friday, August 5, the company declared an undefined net loss for the 1st half of 2016. The loss was blamed on lower LED sales and higher operating expenses.
Last Gasp Efforts
About 2 hours before the loss announcement, the company presented two new share issue schemes: one under General Mandate, GM and the other under Special Mandate, SM. If successful, it would issue 2.6 million new shares , at .25 per share for net proceeds of 616 Million rmb, about 79.4 Million $US. Both would be to a minimum of 6 investors and subject to a 6 month lock-up. Per the filing, the GM shares wouldn’t require shareholder approval while the SM would. The price is a 16.7% discount to August 5 closing and a 7.3% premium to the prior 5 day average. The two are not inter conditional. As shown below, the full issuance would decrease public share ownership by 28.5%. Proceeds for both were for working capital, soccer team funding and future business development.
Source: HK Filing. Note 1: Chairman & Director, Note 2: Directors
Potential problems were noted long before the Glaucus report in March when the Wall Street Journal questioned unusual trading activity in a small-cap, minimally profitable company with a potential for day to day returns of a whopping 791%. Even the French soccer team it bought, Sochaux-Montbéliard SA (“FCSM”), was skeptical as to how the Chairman of Techpro, Li Wing Sang, (aka Amos Li Wing Sang), could hang out in France every week in France while running a company. They were also worried about the company’s ability to finance their needs.
It is doubtful the share issuance will be approved. After the recent events, the odds are in favor of Glaucus. Looks like light’s out for Techpro.
(Disclosure: I have no interests in Techpro.)